Sunday, February 28, 2010

Illegal immigration and unemployment

In the comments from the previous post, blogger Robert Wiblincontested my presumption that unskilled immigration raises the native unemployment rate. We may be talking past one another, as he provided links to studies finding small decreases in unemployment from increased levels of overall immigration. Given the inherent difficulty in tracking illegal immigrants, these studies probably disproportionately attempt to gauge the relationship between legal--rather than total--immigration and unemployment levels. To the extent that the two correlate positively over time, though, it's a chicken-and-egg question: Do immigrants decide for whatever reason to come to an area and subsequently engage in entrepreneurial activities that lead to a net increase in that area's overall employment rate, or does a growing area in need of laborers and professionals attract immigrants to it?

The number of controls and assumptions necessary to tease out the stand-alone effect of immigration--never mind the challenges presented in trying to separate EB-5 immigrants from the MS-13 variety--is daunting, with the outcome contingent upon what controls and assumptions are made.

Michigan, home to Ford, GM, and what's left of Chrysler, suffers the nation's highest unemployment rate (14.6%), but has few illegal immigrants. Removing it from the analysis boosts the correlation to .41 (p=.00, two-tailed).

This, of course, does not prove causality. But it does make it tougher to accept the assertion that higher levels of illegal immigration lead to lower levels of unemployment, when it is higher levels of unemployment that are associated with higher levels of illegal immigration in the US.

29 comments:

Economists typically break unemployment down into a bunch of categories: business cycle, structural and frictional. I'd be tempted to add 'disfunction' unemployment to account for people who are simply so incompetent as to lose value at any wage level.

Illegal immigrants probably don't increase business cycle unemployment, in fact they are as likely to provide an overall stimulus to the economy and reduce it (certainly that has been their effect in Australia). They can also push up house prices, which would help smooth over the adjustment in property values in the US. If structural unemployment is caused by factors that target illegal immigrants especially, then that could increase unemployment. But wage controls, efficiency wages and unions have less impact on illegals if anything. I can't think of any reason why search unemployment would be higher for illegals except that they may have to try to keep a low profile to avoid deportation. As for 'disfunction' unemployment, it is probably lower among immigrants both legal and illegal ; the disfunctional ones won't have the gumption to immigrate.

Looking at the situation in terms of demand for and supply of labour, illegals should have no net impact - they can only consume what they produce, so they should demand the same amount of goods that they produce. In any case, outside of serious recessions and depressions I don't think 'insufficient demand' makes much sense as an explanation for unemployment. Unless people are hoarding money, we should be buying whatever we produce. Certainly though, disproportionately unskilled migration could change the ratio of skilled:unskilled wages.

Looking at the empirical data connecting immigration (illegal or otherwise) is devilishly hard as you say. However, those studies I link to make the best job of it that has been performed and cover more places and times than your snap-shop correlation by states can. If normal immigrants have a negligible impact on local wages and unemployment, it's not clear why illegals should be any different. There's no theoretical reason even why unskilled or dumb people should have higher levels of unemployment than skilled and smart people except for their own incompetence at applying for jobs. Barring structural factors, they should simply earn lower wages.

I would be interested to know whether your correlation remains for unemployment rates at times of near full employment. The US labour market is in a massive and unusual disequilibrium now, so our usual understanding of unemployment may not work. Matching up 2008 illegal immigrant numbers with January 2010 unemployment isn't such a great ideal either - could you correlate it with January 2008 unemployment (before the recession hit the labour market) and report the statistical significance of that?

One other thing is that most illegals move to Southern states - I would be worried that there may be some reason why Southern states have higher levels of unemployment than Northern states, which then correlates with levels of illegal immigration.

I just noticed that your were looking at whether "unskilled immigration raises the native unemployment rate", whereas I was focussed on whether the unemployment rate of everyone in the country together (hard to get over my utilitarian impulse). Some of my discussion is still relevant to your question though.

@robertwilbin: "If normal immigrants have a negligible impact on local wages and unemployment, it's not clear why illegals should be any different."

I think this is the root of why economists are typically so very wrong about the effect of immigration - they typically treat 'immigrants' as a homogenous category.

In fact immigrants are vastly heterogeneous at the level of individual persons, as summarized by averages.

In economists language, immigrants to different places at different times have varied extremely widely in 'skills' or 'human capital' - in psychologists language they vary in 'intelligence' and 'personality' (both substantially heritable), in sociological language they vary in 'culture' (also substantially transmitted between generations).

The heritability/ transmission aspect means that the (widely varying) characteristics of immigrants strongly tend to be perpetuated in their descendants.

But the assumption that 'immigrants' makes a meaningful category is either silly (a professional deformation based on a simplification which needs to be dropped) or dishonest (when argued by leftist politicians).

The idea that the ultra-high-intelligence, upper social class Ashkenazi Jewish US immigrants from Central Europe of the late 19th and early 20th Century are economically inter-changeable with current US mass illegal immigration from South America simply because they are all ‘immigrants’ is so absurd that it borders on delusional - yet of course this 'delusion' is precisely contemporary mainstream economic analysis and leftist political analysis!

bgc: Comparative advantage in first year microeconomics would say that less productive workers will get lower wages, but it's not clear why they should be more likely to be unemployed. If you can think of a good reason why they are more likely to end up unemployed, I'd love to hear it.

@robertwiblin: "If you can think of a good reason why they are more likely to end up unemployed, I'd love to hear it."

Obviously, the great mass of unemployment IS concentrated among those who are least productive, as a matter of uncontroversial observation.

Reasons why?:

1. Minimum wage legislation is in place such that employers are forced to pay higher than a worker is 'worth' in terms of productivity. So, employers do not want to employ the lowest productivity workers. (Reference – Basic Economics – Thomas Sowell)

2. Welfare benefits are greater than the very low wages which very unproductive people would legitimately attract. So they do not want to work, because working would reduce their standard of living.

3. That the least productive workers cannot find a job that they can safely be trusted to do (without excessively expensive supervision) in modern highly technological societies - which is presumably why the US military will not accept the bottom 30 percent of the US population for intelligence (below approx IQ 92). Very low IQ recruits cannot do a useful job in a modern army, and in fact consume resources, pose a danger and reduce military capability.

Whereas in the past many humans were used simply as machines for repetitive and almost 'mindless' mechanical tasks - mainly in agriculture (and were sometimes needed to be disciplined very harshly even to make them perform these tasks); by contrast the modern economy simply lacks niches for low productivity (i.e. low intelligence, low conscientiousness, violent, untrustworthy, unreliable) workers; and lacks the harsh coercive discipline which might enable (for instance) violent, lazy and unreliable young males to be made to do productive manual work.

These are just a few reasons why in the US today low productivity people are not just likely to be unemployed, but are often permanently unemployable - and these traits will on average be passed onto their descendents genetically and by cultural transmission. So the situation should be regarded as essentially permanent.

This is simply a factual argument, and does not in itself say anything about the desirability of allowing mass immigration of low productivity people into the USA.

But the argument makes clear that mass immigration of low productivity people is overwhelmingly likely to be economically damaging to the US economy since these will likely become chronic dependent - and to increase structural unemployment.

However on the political left, the creation of permanent mass state dependency and unemployment is a feature, not a bug; since it creates a large pool of solid left-voters.

WHAT A JOKE!AMERICANS CANNOT COMPETE WITH THE AMOUNTS OF MONEY DISTRIBUTED TO OUR POLITICIANS? BUT WE CAN EJECT THE CONNIVING LEGISLATORS FROM OFFICE WITH OUR VOTES. WE MUST BE WATCHFUL OF ILLEGAL ALIENS VOTING IN MID TERM & ANY ELECTIONS FOR PANDERING LAWMAKERS. ONLY INDIANA AND VERY FEW STATES DEMAND VERIFICATION OF CITIZENSHIP.

As more and more states subjected to near bankruptcy through the illegal immigration invasion, they will be promoting ways to safeguard the legal population? Not perfected yet, but E-Verify is being continuously updated. New tools are being added to E-Verify arsenal including photo identification from the ICE records of green card holders and all immigrants. Soon it will be a 100 percent proof and every working citizen and legal resident better demand that their spineless politicians make its use mandatory. Another fact is that Homeland Security is inquiring into using ITIN IRS records. This is a major catastrophe for the legal US workforce, they should also should consider using US Census records to expose illegal aliens and their extended families? Seeing that Washington is full of corruption, having being brought and sold by the open border businesses sector. Individual states are fighting back by initiating their own immigration enforcement. Georgia, Arizona is no different from many more states that have decided the federal government have no intentions of sealing the borders or halting foreign nationals from overrunning us. Lax States like the--SANCTUARY STATE OF CALIFORNIA--will soon feel the massive burden, as millions of desperate illegal aliens look for more easy pastures to sponge from? Law abiding states are seeing illegals packing their belongings and departing for California? Americans have been so programmed to believe the downright lies that millions of cheap foreign labor, is good for their economy. Ask Californians already been heavily taxed, rising crime, deteriorating services and paying billions for their welfare. THE STATE IS BROKE.

Call your Representative at 202-224-3121 and demand rigid immigration enforcement. It should be a citizens or legal immigrants duty to--REPORT--to ICE, any illegal labor in your workplace or other location.

The cost to the American people for supporting illegal immigrant families is unimaginable. Read the truth about corruption and the illegal immigration occupation of our country at NUMBERSUSA, JUDICIALWATCH, IMMIGRATIONBUZZ, RIGHTSIDENEWS & DIRECTORBLUE.

Isn't the more relevant question whether or not the population receiving the immigrants is happier for it? Are the people who were here before the 1965 Immigration Act, and their descendents, living more satisfying lives than they would have if that legislation hadn't been enacted? Have smart phones and cheap landscaping compensated for what we've lost?

How does the unsustainable upward pressure on housing prices via nominal money creation (without a corresponding increase in real wealth) smooth over the adjustment in property values in the US? Seems to me that absurd loans with little chance of ever being paid back, concentrated in the US in the four 'sand states' of Nevada, California, Florida, and Arizona--states with the highest concentrations of illegal immigrants in the country (#1, #2, #5, and #6, respectively)--in aggregate, constituted a crucial element of the recession we've subsequently seen played out. One does not have to look hard to find anecdotes of undocumented menials making $15k a year taking out loans to buy houses for several hundreds of thousands of dollars.

In a society completely devoid of transfer payments and socialized costs of any kind, you're probably right. But that is not the sort of society most contemporary westerners desire, and, realistically, it is not one we are likely to ever see in our lifetimes. Unfortunately, a quasi-welfare state becomes increasingly precarious as the portion of the population that consumes more than it produces grows. The federal income tax only accentuates this problem, because illegal immigrants often enjoy an artificial increase in their desirability to employers--being paid in cash, without concern over tax filings and related complications, illegal immigrants are able to offer their services to employers for ~25% less than law-abiding natives are able to, while still netting the same compensation that the native who must demand an income tax premium does.

Re: dumb/unskilled people and applying for jobs, it's not just at applying for jobs, but in keeping them, let alone excelling at them. Professor Charlton points to the US military, which separates recruits into several categories based on their AFQT scores, to illustrate how intelligence relates to job performance. This comprises a large chunk of Murray and Herrnstein's The Bell Curve (contrary to popular opinion, only a small portion of the book has anything to do with race) as well.

Because of the US' affluence relative to central and southern America (despite proclamations about NAFTA reducing income disparities between the US and Mexico, US per capita wealth has steadfastly remained at four times that of Mexico for decades now), those with no prospects south of the border can reasonably hope to live in greater material comfort in the US, securing employment, at least temporarily, by allowing employers to realize marginal labor savings and in some cases greater productivity. But these illegal immigrants are not inventing new technological processes or starting up new companies (those of Mexican descent in the US are conspicuously absent among the ranks of patent holders)--they are displacing unskilled natives. If we could swap Juan for Jarome, from a cold-calculating perspective, perhaps we would. But in reality what we end up doing is subsidizing Juan to some extent (he sends his kids to school at $10k a year per, uses taxpayer-funded infrastructure, etc) and Jarone to a great extent, when we could've just been subsidizing Jarome to a moderate extent.

I do not make any grand pronouncements with snapshots like the one presented in this post because I realize the relevant variables (and the inevitable false-positives) are too legion for me to hope to adequately address them and then definitely prove that my addressing is appropriate. But for knowledge's sake, your suggestion is interesting and something I will certainly do with free time this weekend.

"Michigan, home to Ford, GM, and what's left of Chrysler, suffers the nation's highest unemployment rate (14.6%), but has few illegal immigrants."

Really????? I live in Michigan, and this place seems full of illegals. When I go shopping at WalMart on sunday evenings, sometimes it seems that I'm the only Ebglish speaker in the store, other than the help. I feel like I'm shopping in Mexico City.

As a matter of theory, unskilled immigration should reduce unskilled wages relative to skilled wages. Over the 1970-present period in the US (a time of high unskilled immigration) the wages of the unskilled have fallen relative to those of the skilled, as a matter of utterly uncontroversial fact. To what extent these two things are causally linked is controversial.

The leading proponent of the theory that immigration depresses native wages is George Borjas of Harvard. Here's a quote from one of his papers:

Statistical analysis shows that whenimmigration increases the supply of workers in a skill category, the earnings of native-born workers in thatsame category fall.

The pro-immigration side in this debate is making an outlandish claim: that, unlike practically any other good, unskilled labor's price does not fall when its supply increases. This outlandish claim carries a correspondingly very high burden of proof, and the pro-immigration side does not come close to carrying this burden.

Anon beat me to it--see Proposition 187 in California. The federal government's approach to illegal immigration is much the same as Gray Davis and the Carter-appointed judge who struck the voter-approved proposition down.

Black Death,

According to the Pew report used to supply illegal immigrant population estimates, Michigan is home to ~110,000--not a negligible number, but in the bottom half among states as far as share of the population is concerned.

"Anon beat me to it--see Proposition 187 in California. The federal government's approach to illegal immigration is much the same as Gray Davis and the Carter-appointed judge who struck the voter-approved proposition down."

Prop 187 was a roundabout approach to limiting the impact of the Federal refusal to adequately let alone aggressively enforce the immigration laws and failure to deport illegals. What they really needed to do was start constitutional amendment proposal to require the enforcement of all laws including immigration laws. We really need a Rule of Law amendment that prohibits selective enforcement and non-enforcement.

This might interest you AE (edit away the rest after the first paragraph if you don't like long comments):

http://www.cgdev.org/doc/books/Labor_Mobility/Chapter_Three.pdf

"Immovable Idea Six: Movers Are a Fiscal Cost Because They Use More in Public Services Than They Pay in Taxes

One popular idea is that migrants are a net fiscal cost—they consume more in publicly provided services than they pay in taxes. There are huge debates about whether this is empirically true or not. A U.S. National Research Council study concluded, at current configurations of taxes and the benefits and structure of immigration, “the annual fiscal impact per U.S. resident of an increase of 100,000 per year in the immigrant flow under the baseline circumstances . . . to be roughly +30 $/person, composed of +40 $/person at the federal level and −10$ per person at the state and local level” (National Research Council 1997). But more important, as to whether any given estimate is better or worse, there is no correct answer to the question about the net fiscal cost, for two reasons.

First, even within a given structure of mobility, “the” fiscal cost has no single correct answer because it is entirely contingent on the structure of immigration—by age, by education, by family composition. Younger migrant workers with no children pay far more in taxes than they receive in benefits. Migrants with low education and earnings who bring children constitute a net fiscal cost—because of publicly provided education. Notice that the studies in the United States show the net fiscal impact varies from positive for federal government and negative for states because of the differences in the taxes collected and services provided at the various levels. This emphasizes that there is no way to extrapolate these results from the United States to any other country, because they would differ in the structure of taxation (direct versus indirect taxes) and benefits.

Part of this is the idea, commonly repeated, that “open borders” and the “welfare state” are incompatible, which is true. But this has nothing to do with labor mobility, unless one presumes that every person who is physically present in a country necessarily acquires a set of claims on benefits. That is not true. The laws about the distribution of benefits can be structured in nearly any way countries choose (subject to fundamental rights or constitutional constraints). A country may choose to have a minimum entitlement payment (independent of whether the person works or not) as part of its social benefits (and there is no compelling reason not to have such a benefit). In wealthy countries, this minimum may be far more than people in poor countries earn by working. It would be impossible to have “open borders” and a scheme of social protection that makes these benefits available to everyone who is physically present. But this does not mean that a “welfare state” and “increased labor mobility” are incompatible. No one imagines that the welfare state and massively increased tourism are incompatible—because physical presence as a tourist creates no claims on social benefits."

Robert, comparing immigration control to slavery and apartheid is not a good way to get people to take you seriously. That advocacy piece you linked to is absurd.

Besides, the argument here is whether illegal and unskilled immigration is beneficial to residents of the host country. Are you conceding that it is not, but we should allow it anyway since we're a bunch of evil racists if we don't?

And please, "immigration would have helped ease the financial crisis"? Immigration was one of the main root causes of the financial crisis!

Anon: I make the comparison (though I avoided doing so here) because the analogy is apt.

Many economists disagree with you regarding immigration. Immigration had little to no role in creating the crisis I think, and anything which pushes up the real values of houses and land (which immigration will do) will help reduce the spiralling default on mortgages. I trust the economists I linked to over an anonymous commenter.

There is some level of immigration that is optimal for natives. I think it's quite high, but that's dependent on the rules applied to them. I am not convinced immigrants increase unemployment, and even if they did, I would blame industrial relations law for creating involuntary unemployment, not the immigrants.

"and anything which pushes up the real values of houses and land (which immigration will do) will help reduce the spiralling default on mortgages."

Lettuce pickers on medicaid do not drive up real estate prices because demand is defined as willing and able to pay. They are not.

Real estate prices were driven up by low interest rates because the monthly payment at 3% on $200K is less than 7% on $100K.

The point of this blog is to look at real numbers and compare it to what experts are telling us, not just blindly believing. We trust our own faculties and the numbers should bear out their pronouncements. If not we keep digging.

Plenty of otherwise reasonable people trusted those who advised them to invest buy and hold for retirement in the stock money and have lost a ton of money. Plenty of independent minded people saw it for the BS it was and made money betting the other way.

"Lettuce pickers on medicaid do not drive up real estate prices because demand is defined as willing and able to pay. They are not."

A lot of the houses people are defaulting on today are hardly luxurious remember. The main thing is, even if they will only be able to afford such houses some years in the future (and some lucky proportion will land jobs and buy them in the near future), the expectation of higher future demand for land and housing will push up prices today. House prices should represent the 'net present value' of future rental value of the property (incidentally, current low real interest rates increase the relative importance of future rents). Higher future rents push up today's prices in anticipation and can reduce defaults.

" the expectation of higher future demand for land and housing will push up prices today."

No it won't.

Only buyers can push up prices.

That is why real estate has fallen; sellers outnumber buyers.

If buyers buy on speculation because they think prices will go up, then the prices will rise but right now speculators are waiting for prices to fall further because so many houses are bank owned and the number grows daily.

First of all, as for illegal aliens' being able to "consume what they produce", you are missing that they send billions of actual dollars "home". That's money not spent in the US. Unless it's spent solely on things we import to their home countries, it's lost to our economy.

Second, many states allow illegal aliens to receive all sorts of welfare or government provided social services, including Medicaid, usually by simply not verifying status. This was one objection to Obama's health care reform. It expanded government subsidized benefits without setting up proper verification procedures.

Third, illegal aliens receive all kinds of benefits through their US-born children. FWIW, most US citizen adults who get welfare do so through their children. This isn't new.

Also, see the link below that discusses how illegal aliens get earned income tax credits from the federal government. One recent edition of "The Social Contract" was devoted to this issue alone.

Finally, a friend of mine bought a house in Springfield VA in an area that was devastated by the housing bubble. He was OK - he bought it years ago and paid something like $130,000 for it. Around 2004-2006 he happened to live on a street with a lot of overcrowded housing - 3 families crammed into one single-family house, etc.

In 2008, his house was appraised at $423,000. In 2009, it was $299,000 and his neighborhood was full of houses either long-term empty or actually in foreclosure.

I asked him if most of the now-empty/foreclosed houses had been the over-crowded ones. He replied that they all were.

Unless you expect most middle-class citizens to develop a taste for living in rapidly decaying suburban slums and sending their kids to ever more expensive public schools even as they deteriorate in quality, I wouldn't bet on low income, low skilled immigrants, legal or illegal, to "push.. up the real values of houses and land". Part of the reason that the number of these over-crowded houses had increased so much was that the old single family households skedaddled when the first few multiple-family residences came on the scene. The real estate agents and banks were selling to people who couldn't possibly afford the houses they bought.

Younger migrant workers with no children pay far more in taxes than they receive in benefits.

Not if they are avoiding income taxes entirely. Living in crowded corridors results in low per-capita property tax payments as well. Further, the earned income tax credit allows low-wage earners (legal or otherwise) to actually derive a net benefit from income taxes.

The expectation of higher future demand for land and housing will push up prices today.

If the resources to support such a systematic increase in prices do not exist, as has been the case recently, with prices utterly beyond the ability of purchasers to actually pay for, this seems to guarantee a painful readjustment of prices in the future. I think interest rates have a lot to do with allowing this to occur, but the larger the population of unskilled, low-income people, the more acute the consequences. I'm also unconvinced that pushing real estate prices higher is necessarily desirable--in all other aspects of our lives, it is decreasing, not increasing, prices that indicate a greater standard-of-living having been realized. Why do we treat housing prices differently?

More generally, the purely economic aspects of largescale, unregulated immigration are only parts of the broader question. The higher the percentage of first-generation Mexicans settling in the US, the more the US is going to come to represent Mexico. This does not strike me as being desirable.

Before the downturn, upwards of $25 billion was being sent from the US back to Mexico, and had become that country's leading source of imported income--higher even than oil revenues. The benefits for Mexico are obvious (which is why the Mexican government actively petitions for 'comprehensive immigration reform' in the US and even provides aspiring migrants with tips on how to illegally make it into the US)--export your social problems to the US to deal with, and get $25 billion a year back in return. The benefits to the US, given its current quasi-welfare state status, are much less clear to me.

The correlation between unemployment (jan 08) and illegal immigrants as a percentage of the population (throughout 08) at the state level is .13 (p-value = .35), so you're correct--there is no meaningful association between the two. To the extent that a narrative can be supposed from this, when the economy was enjoying a(n unsustainable and illusory) boom, people of all skill levels and varying residency statuses could pretty much find work wherever they went. Then real adjustments occured and the states with the highest percentages of low-skilled workers (formerly seen as marginally productive but no longer so) were hit hardest by increasing unemployment.

I used to live in Northern VA (NoVA) in Alexandria, a hop-skip-and-jump from Springfield, in a one-BR apt. I enjoyed not having lawn duty, maintenance, etc and was quite happy in my rental status. For most of my 35+ years in the area, apartment-dwellers paid relatively little in taxes through their rents, but they also cost their localities relatively little in tax-supported needs for one very compelling reason: We apt-dwellers had few children (most of us had none) and so cost zilch or near zilch in schooling.

Now in NoVA, those same apts often have several children as the low-skilled immigrants - or illegal aliens - pack 'em in. Can't afford an ARM Mortgage? Rent a 2-BR apt.

It's interesting. Fairfax County, which has some of the best schools in the US, is starting to see the effects of this deluge of less than stellar students. How long will they be able to claim top-caliber schools when they are struggling with high volume ESL classes and having to confront real budget constraints that dictate that they MUST educate those ESL students who struggle for several years in middle & high school and then drop out while at the same time facing the dropping or limiting of the type of classes (music, art, etc) that attract the upper-middle class students - or more correctly their parents - or ever higher taxes. Add to this the fact that many newer residents of the county can't pay such taxes and many of those who can don't want to because their kids are grown, they send their kids to private school, or they have no kids.

You should always temper the negative with the positive. For example, are you aware of the Eb5 visa? This visa is creating thousands upon thousands of jobs for America, and all we are giving in return is a simple green card visa. Please take care to note the positive aspects of immigration as it relates to employment, because there are many positives to be had!

"It's interesting. Fairfax County, which has some of the best schools in the US, is starting to see the effects of this deluge of less than stellar students."

On the plus side, agitation by white and asian parents has nixed "Affirmative Action" at the nation's best high school (TJHSST). Fairfax County schools in general are going downhill but the best and the brightest still get the best public education in America.

On the minus side, TJHSST is now a majority-asian school much like the California University system. It is unfortunate that the resources of this elite school created by American whites are now used mostly to educate the children of foreigners.

It is unfortunate that the taxpayers who created this program will be subjugated by the "citizens of the world" who have leeched onto the education system they have enabled.

The question of whether or not illegal workers are taking jobs from American workers is one that can be easier answered through logic than numbers. Simply put, if there were NO illegals, American workers would be doing those jobs. Can it be any clearer?